City of Toronto's long-term financial direction

8/17/2019 City of Toronto's long-term financial direction

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STAFF REPORT ACTION REQUIRED

The City of Toronto's long-term financial direction

Date: May 16, 2016

To: Executive Committee

From:

City ManagerDeputy City Manager & Chief Financial OfficerDeputy City Manager – Cluster ADeputy City Manager – Cluster B

Wards: All

ReferenceNumber:

SUMMARY

This is a report on the long-term financial outlook for the City of Toronto.

The City of Toronto is the sixth largest government in Canada, with a total 2016operating and capital budget of nearly $15 billion. This represents an investment of over

$5,200 per resident, supporting services vital to our community and economy.The budget is decided by City Council on an annual basis. This is a highly transparent process, providing detailed financial data and encouraging public participation.

This report explores the underlying conditions of City finances by reviewing the expenseand revenue patterns of recent budgets. The past six years demonstrate a consistent pattern and are the focus of this analysis.

In order to provide the clearest understanding of the total cost and levels of municipalservices, the analysis is primarily focused on overall (gross) expenses and revenues.Where appropriate, data are adjusted to ensure comparability over time. The general

approach is to broaden discussion from the short-term narratives that typically dominate asingle budget cycle.

The basic patterns of the recent past are straightforward. Overall City expenses have beenconstrained over the past six years, rising much more slowly than earlier periods. Costshave declined slightly when adjusted for the combined effects of inflation and populationgrowth.

Staff report for action on the City's long-term financial direction 1

EX15.1


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This expense constraint has been supported by savings from cost-shared social programsand deferrals of operating and, particularly, capital expense. The practice of deferringnecessary expense is most evident in the increased number of unfunded capital projectsand priorities, now estimated at up to $29 billion over 15 years.

On the revenue side, reliance on property tax has decreased over the past six years. Whenadjusted for price inflation, property tax revenues have also actually decreased since2010. Overall revenue growth has been supported by increases in utility rates for waterand solid waste, Toronto Transit Commission (TTC) fares and other user fees and rapidgrowth in Municipal Land Transfer Tax (MLTT) revenues.

Each of these expense and revenue conditions has been critical in supporting the balanced budgets and selective increases in services achieved over the past six years. The analysisstrongly suggests that the positive circumstances of the recent past are unlikely tocontinue and, at the very least, cannot form the basis for responsible future fiscal planning.

The report also provides a basic forecast of future expense pressures and revenue performance, adopting both a longer time frame and building in key inputs from Cityagencies. This analysis is necessarily high-level and will be subject to revision as Council provides specific direction and additional data emerges over time.

Quantitative projections confirm notable expense challenges in the future, in addition totypical labour and material cost pressures.

Projected expense pressures include:

• funding requirements for TTC and Toronto Community Housing Corporation(TCHC)

• annualized costs related to earlier capital and operating commitments

• addressing prior year deferrals of employee benefit liabilities and adjustment inresponse to the loss of the Toronto Pooling Compensation grant.

At the same time, it is anticipated that revenue growth will slow in the absence of policychanges.

Projected overall revenues for future years will influenced by:

• continued low growth in property tax revenues

• leveling off of increases related water and solid waste charges, TTC fares andother user fees

• anticipated maturity of MLTT revenues.

Looking towards future years, there are unlikely to be quick solutions or shortcuts toachieve balanced budgets as:

• annual surpluses are falling and are, at any rate, an essential element of thealready inadequate capital finance strategy



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• reserve funds are already at relatively low levels compared to other jurisdictions

• funding from the governments of Ontario and Canada will be essential to City building, but cannot replace long-term gaps in operating funding or fully offsetunmet capital needs.

The overall gap between expense and revenue will likely draw attention. The intention isexplicitly not to set off a sense of immediate urgency, expense slashing or revenue grab.

It is more important to focus on shifting the underlying structure of both expense andrevenue management than to search for short-term measures. In a very real way,decisions over a number of years have made both further expense tightening and revenueincreases inevitable. It is no longer appropriate or feasible to defer difficult financialdecisions to future years.

The time has come for a direct conversation concerning the City's finances.

Remediation cannot be accomplished in a single step or outlined in a single report. It is

not possible or appropriate to jump from diagnosis to solution in the absence of ameaningful engagement with Council and Toronto's residents and businesses. The problems have developed over years, and solutions will take both time and effort.

The report therefore outlines a series of principles and directions to guide thedevelopment of new strategies to manage expense and expand revenue.

Many of the principles and potential measures to be considered will be controversial. Butreal change will be required to ensure the City's financial stability into the future and tosupport Council's policy direction to invest in and support the growth of our community.

The 2017 Budget cycle will overlap with the long-term considerations described in this

report. The pressures expected for 2017 may pose challenges. As the City undertakes the budget process over the coming months, it will important to ensure consistency betweendecisions taken in the short-term and the City's emerging long-term priorities.

RECOMMENDATIONS

The City Manager, Deputy City Manager & Chief Financial Officer and Deputy CityManagers of Cluster A and B recommend that:

1. City Council request the City Manager and Deputy City Manager & Chief Financial

Officer to report in the fall of 2016 on a framework for the City's multi-year financialand budget process.

2. City Council request the City Manager and Deputy City Manager & Chief FinancialOfficer to report in the fall of 2016 on strategies and processes to strengthen the City'sstrategic decision-making and financial oversight that will:

a. Support Council in setting priorities and outcomes in order to deliver itsstrategic agenda;



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b. Have a multi-year focus;

c. Integrate program planning for City services and the infrastructure delivered by City programs, through divisions and agencies, with the City's financial planning and budgeting to achieve the strategic allocation of resources to meetintended outcomes; and

d. Strengthen the City's financial management and oversight of City programsand agencies.

3. City Council request the City Manager and Deputy City Manager & Chief FinancialOfficer to report in the fall of 2016 on the framework for a multi-year ExpenditureManagement Plan, which should include short-term and long-term strategies todeliver a business transformation program that:

a. Modernizes processes, improves productivity, embeds efficiencies to achieveexcellence in service delivery and maximizes value for residents; and

b. Strategically manages assets to maximize their use in supporting servicedelivery.

4. City Council request the City Manager and Deputy City Manager & Chief FinancialOfficer to report in the fall of 2016 on multi-year revenue strategy that:

a. Examines ways the City can optimize revenue generation from existing andnew sources;

b. Identifies implementation costs, timing, and the sustainability of revenueoptions;

c. Establishes principles to guide the selection of potential revenues; and

d. Establishes a framework for the further application of both existing and newrevenues

5. City Council request the City Manager and Deputy City Manager & Chief FinancialOfficer to undertake an asset optimization study, including consideration of how possible proceeds could be used to address the city's capital deficit through the CityBuilding Fund and report in the fall of 2016.

Financial Impact

The recommendations and additional actions contained in the report are intended toimprove the long-term financial stability of the City. It is expected that fullimplementation of the directions described through recommendations will ultimatelyrequire a shift in how the City approaches its annual budget and long-term service plans.



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DECISION HISTORY

At its meeting of April 12-14, 2005, City Council unanimously approved the first Long-Term Fiscal Plan as recommended by the Ad Hoc Committee.

http://www.toronto.ca/legdocs/2005/agendas/council/cc050412/cofa.pdf

At the Budget Committee meeting on March 12, 2010, the Deputy City Manager & ChiefFinancial Officer provided an update on the 2005 Long-Term Fiscal Plan (LTFP).

http://www.toronto.ca/legdocs/mmis/2010/bu/bgrd/backgroundfile-28412.pdf

At the Budget Committee meeting on February 10, 2011, the Deputy City Manager &Chief Financial Officer gave a presentation on the 2012 Outlook and an update of the2005 Long-Term Fiscal Plan.

http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2011.BU9.3

At its meetings on October 8-11, 2013 City Council affirmed the City Manager's 26

Strategic Actions to guide the Toronto Public Service from 2013 to 2018 in the City'sservice planning, multi-year budgeting and performance planning process. StrategicAction #23 called for an update of the City's Long-Term Fiscal Plan.

http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2013.EX34.5

At its meeting on May 5, 2015 City Council adopted recommendations related to thereport "Recommended Multi Year Service Based Planning and Budgeting Process"including a request for the Deputy City Manager & Chief Financial Officer and the CityClerk to report back with recommendations concerning ongoing reviews of service plans,levels and performance.


At the Executive Committee meeting on December 1, 2015, the City Manager and theDeputy City Manager & Chief Financial Officer delivered a presentation titled "City ofToronto - Discussion of Fiscal Framework," which provided a multi-year perspective onCity finances prior to the start of the 2016 budget launch.


At its meeting on February 17, 2016, City Council requested the City Manager andDeputy City Manager & Chief Financial Officer to commission an external consultant’supdated analysis of the City of Toronto Act revenue potential and to include a Strengths,Weaknesses, Opportunities and Threats analysis of obtaining permission and collectingrevenues through a diversified model.



http://www.toronto.ca/legdocs/2005/agendas/council/cc050412/cofa.pdfhttp://www.toronto.ca/legdocs/mmis/2010/bu/bgrd/backgroundfile-28412.pdfhttp://www.toronto.ca/legdocs/mmis/2010/bu/bgrd/backgroundfile-28412.pdfhttp://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2011.BU9.3http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2011.BU9.3http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2013.EX34.5http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2013.EX34.5http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX5.18http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX5.18http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX10.22http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX10.22http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2016.EX12.2http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2016.EX12.2http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2016.EX12.2http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX10.22http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2015.EX5.18http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2013.EX34.5http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2011.BU9.3http://www.toronto.ca/legdocs/mmis/2010/bu/bgrd/backgroundfile-28412.pdfhttp://www.toronto.ca/legdocs/2005/agendas/council/cc050412/cofa.pdf


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ISSUE BACKGROUND

Update to the City's Long-Term Fiscal Plan

The City's first post-amalgamation Long-Term Fiscal Plan was approved in 2005. TheCity's practice has been to update the Long-Term Fiscal Plan every five years. An update

was provided in 2010 and approved by Council in 2011. In keeping with the 5-yearupdate cycle, staff are bringing forward this report on the City's financial direction tosupport development of an updated Long-Term Financial Plan (renamed from "fiscal" toreflect a broader strategic focus on both revenue and expense management) in 2016.

External observations regarding City finances

The annual budget process of City of Toronto has long included warnings with respect tofinancial sustainability. City Managers and the Deputy City Manager & Chief FinancialOfficers have expressed persistent concerns, suggesting a need for stronger expensediscipline and additional revenue.

These concerns have been amplified by a number of external reports produced over the past decade.

In 2005, the report of the Governing Toronto Advisory Panel, The City We Want – The

Government We Need , noted that “the downloading of an increased share of social

programs, and the inheritance of a housing portfolio in need of serious repair, has placed

additional, open-ended stress on an already severely stretched City budget.”

http://www.toronto.ca/legdocs/2005/agendas/committees/pof/.../it004att.pdf

In 2008, the final report of the City-commissioned Fiscal Review Panel, Blueprint for

Fiscal Stability and Economic Prosperity – a Call to Action, concluded that “chronicrevenue and expense problems and huge unfunded capital requirements and other

contingent liabilities” exist. The report indicated that various approaches would be

necessary to address annual shortfalls, including new revenue opportunities, cost

containment and reductions; debt management strategies; and a more predictable fiscal

arrangement with upper level governments.

https://portal.publicpolicy.utoronto.ca/

A 2014 review of Toronto's finances, Is Toronto Fiscally Healthy?, produced by the

University of Toronto's Institute on Municipal Finance and Governance asserted that

"Toronto faces cost pressures and its aging infrastructure and investment needs present a

huge financial challenge.”

http://munkschool.utoronto.ca/imfg/uploads/288/1581fiscallyhealthyr5final.pdf

In a 2014 report produced by CD Howe, Baffling Budgets: Canada's Cities Need BetterFinancial Reporting, the authors expressed concerns regarding limitations in the annual budget process for Canadian cities, including Toronto.

https://www.cdhowe.org/pdf/Commentary_397.pdf


http://www.toronto.ca/legdocs/2005/agendas/committees/pof/.../it004att.pdfhttp://www.toronto.ca/legdocs/2005/agendas/committees/pof/.../it004att.pdfhttps://portal.publicpolicy.utoronto.ca/en/ContentMap/citiesandcommunitydevlopment/UrbanPolicyandMunicipalGovernance/Practice%20Area%20Library/Mayor's%20Fiscal%20Review%20Panel%20-%20blueprint_report_2008.pdfhttps://portal.publicpolicy.utoronto.ca/en/ContentMap/citiesandcommunitydevlopment/UrbanPolicyandMunicipalGovernance/Practice%20Area%20Library/Mayor's%20Fiscal%20Review%20Panel%20-%20blueprint_report_2008.pdfhttp://munkschool.utoronto.ca/imfg/uploads/288/1581fiscallyhealthyr5final.pdfhttp://munkschool.utoronto.ca/imfg/uploads/288/1581fiscallyhealthyr5final.pdfhttps://www.cdhowe.org/pdf/Commentary_397.pdfhttps://www.cdhowe.org/pdf/Commentary_397.pdfhttp://munkschool.utoronto.ca/imfg/uploads/288/1581fiscallyhealthyr5final.pdfhttps://portal.publicpolicy.utoronto.ca/en/ContentMap/citiesandcommunitydevlopment/UrbanPolicyandMunicipalGovernance/Practice%20Area%20Library/Mayor's%20Fiscal%20Review%20Panel%20-%20blueprint_report_2008.pdfhttp://www.toronto.ca/legdocs/2005/agendas/committees/pof/.../it004att.pdf


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Despite persistent concerns, through the annual budget process Council has been able to:

• plan for balanced budgets, as required by Ontario statute

• point to new services added each year

• emphasize low property taxes and low rate increases

• realize annual surpluses.

This report explores the factors that have helped to mitigate pressures which have beenidentified in the past and assesses the circumstances going forward.

Toronto's annual budget

Toronto's annual budget cycle is important. The budget process establishes the City'sfinancial plan to achieve its priorities for the year. Budget allocations largely determinethe quality and level of municipal services provided to the public. The City budget is usedto establish funding for all City divisions as well as City agencies and corporations such

as the Toronto Transit Commission (TTC), Toronto Police Service and TorontoCommunity Housing Corporation (TCHC).

As a starting point, it is useful to note some of the strengths and weaknesses of the annual budget process.

Among its strengths, the budget process provides detailed financial information and notesconcerning the operating budget and 10-year capital plan. There are opportunities for public input and due diligence review of budget submissions for City divisions. These aresubject to line-by-line review by Budget Committee.

There are, however, important constraints in the data and analysis available to Council

and the broader public through the budget process.

The process focuses narrowly on the fiscal year under consideration. There is littledetailed emphasis on prior year performance and outcomes. Forecasts for revenue andexpense are generally limited to a two-year timespan. Most government budgets ofcomparable size and complexity contain additional analysis of multi-year expense,revenue, economic and intergovernmental factors.

The budget process emphasizes decision-making with respect to "net" or tax-supported budget items – usually translating this directly into potential changes to property taxlevies. This supports accountability to the direct payers of property taxes, but often drawsattention away from the very significant additional resources drawn from residents and

business, particularly fees and utility charges. The "net" basis of accounting also recordsreserve draws as revenue, which potentially suggests that programs are more sustainablyfunded than is actually the case.

Finally, Council is provided with different levels of information for City divisions andCity agencies. Divisions are subject to detailed review by Financial Planning staff andBudget Committee. Agency budgets, while also reviewed by City staff and BudgetCommittee, are subject to board direction and approval. Some of the City's most



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significant expense drivers are embedded in the budgets of TTC, TCHC and the TorontoPolice Service.

A more strategic approach to the City's financial out look

The intent of this report is to take a step back and assess the overall approach to revenuesand expenses of the recent past, and to do this from the perspective of residents and businesses that fund and benefit from the broad range of services delivered by the City.

This analysis involves consideration of financial information beyond any one budgetcycle or term of Council.

This broader strategic approach involves:

• addressing gross or overall revenue and expense and their changes over time, inorder to account for the full cost and all funding sources for public services

• Adjustments for inflation and population growth in order to reflect the underlying

cost of services to Toronto residents and businesses, and ensure full comparabilityover time

• Providing a medium term projection of City expenses and revenues, covering thenext 5 years.

The language and focus of this report is, at times, narrow and technical. It deals with thesomewhat complex practices which define the reporting of operating and capital expensesand the City's various sources of revenue.

But the decisions that Council makes over expense and revenue measures reflect a broader and more consequential set of choices than may be apparent from the numbers

alone.

Operating expenses are not simply government spending for its own sake – they areinvestments of vital public resources by Council towards a broader public good. Councilhas generally emphasized the expansion of, rather than constraints to, municipal servicesdelivered to the public.

Similarly, capital investments address issues around livability, congestion and publicspace in our dynamic and increasingly dense and complex city. The capital investmentsthat Council delivers in the budget are vital contributions to city building. They supportthe development of infrastructure that will ensure the health and vitality of Toronto forfuture generations.

City finances are often complex and seemingly abstract. But they are fundamental toachieving Council's collective vision for a growing, diverse and dynamic community.

Conditions and limitations of this analysis

Projections of future City revenues and expenses are inherently challenging andconditional. They are subject to future economic trends, changing service demands and



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Council decisions. This report draws on conservative assumptions about future performance, using the best information currently available.

This analysis was expedited following the recent completion of the 2016 Budget process.

It is important that this information be provided for consideration by Council and the

public at this stage. The intention is to provide a foundation for meaningful discussionand debate as Council gives consideration to the City budget for 2017 and beyond.

As staff undertake more detailed work on the City's Long-Term Financial Plan, there will be a need for broader consultation and input from the public. It is likely that at least someof the analysis will be corrected or refined as new information becomes available andCouncil decisions are made.

The City Manager, Deputy City Manager & Chief Financial Officer, the Deputy CityManager of Cluster A, Deputy City Manager of Cluster B, as well as the ExecutiveDirectors for Corporate Finance and Financial Planning are confident in the basicdirection and the core analysis presented in this report.

COMMENTS

How the budget has been balanced – expense management

The analysis of Toronto's fiscal sustainability going forward starts with a focus on Cityexpenditures.

This discussion addresses the whole of City expenses including those program areassupported through revenues collected from utility rates, user fees, government transfersand other sources. This provides the best indication of the total cost of government andunderstanding of overall service levels.

Overall expense growth

The total (or "gross") 2016 operating budget expenses for the City are $11.75 billion, orabout $4,000 for every resident. Total capital investment for 2016 is $3.2 billion, thecurrent year allocation of the $33.5 billion 10-year capital plan.

Figure 1 shows the growth in total operating expense over time. This is measured innominal or current dollars – without adjustment for inflation. The 2005 to 2010 periodsaw substantial increases in expense, rising by approximately $3.0 billion. From 2011 to

the present the increase is considerably smaller, at roughly $1.5 billion.The majority of expense increase is driven by base inflationary and labour costs – increases necessary to maintain the same level of service year over year. Council has alsoannually approved new and enhanced service levels. Both components of growth arehighlighted in the figure.



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Figure 1 Nominal growth in the operating budget, base versus new and enhanced, 2002 to 2016

Over the past six years, budgeted gross expenditures have increased moderately at anaverage annual rate of 2.3 percent, as measured in nominal or current dollars. Thecumulative increase has been 14.9 percent. Again, this varies considerably from the preceding six year period (2005 to 2010) when City expenditures grew at an average of6.0 percent annually and 41.4 percent overall (Figure 2).

Figure 2 Nominal growth in budgeted gross expenditures, 2005 to 2016

Expense growth adjusted for inflation and population increases

Additional factors should be taken into account in order to better assess the overall trendand affordability of City expense. Inflation erodes purchasing power by approximatelytwo percent annually, as measured by the Consumer Price Index.

$0

$2

$4

$6

$8

$10

$12

$14

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

B i l l i o n s

Base New/Enhanced

6.9% 6.9%

2.6%

4.8%

9.9%

4.7%

2.4%

1.6% 1.9%

3.1%2.5% 2.5%

0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

6.0% average annual g rowt h

2.3% average annual g rowt h



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After adjusting for inflation, the City's operating expense growth since 2011 falls to about2.4 percent in total, or slightly less than one half percent annually.

As well, Toronto is a growing community with population increasing by 30,000 people orone percent each year. This both complicates service delivery as the City densifies and becomes more complex and provides a broader base of residents and businesses overwhich to spread the costs of government. (Further information concerning the CPI and population data used for this analysis are provided in the Supplementary Data attachmentincluded with this report.)

Adjusting for both inflation and population allows for a more direct view on the cost ofmunicipal services over time. Through this lens, overall City expenses and revenues haveactually declined. Municipal services cost about $165 or 3.8 percent less per residentcompared to six years ago, measured in constant 2016 dollars (Figure 3). Government isless expensive on a per capita basis, despite the consistent addition of new services.

City expenses and revenues have also declined as a share of the Toronto economy. This is

consistent with the operating constraint approaches adopted by the Province of Ontarioand the Government of Canada in the recent past.

Figure 3 Inflation-adjusted per capita gross expenditures, 2010 to 2016 (2016 Dollars)

Sustainability of expense policies and trends

There have been significant changes in the composition of expense over the last six years.These shifts are crucial to explaining the capacity of successive Toronto budgets to bothconstrain overall expense growth and accommodate selected service enhancements. Some program areas show growth, while others have experienced savings (Figure 4).

The share of the City's annual expenses related to three broad service areas – transit,emergency services and rate-supported programs – has increased significantly. Since

$508 $520 $536 $544 $558 $572 $591

$612 $618 $604 $627 $631 $652 $653

$626 $612 $608 $602 $627 $643 $622

$1,190 $1,118 $1,080 $1,054 $1,001 $977 $963

$1,355 $1,354 $1,341 $1,312 $1,305 $1,289 $1,297

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2010 2011 2012 2013 2014 2015 2016

Operations, Agencies& Corp. Accounts

Cost-SharedPrograms

Emergency Services

TTC

Water, Waste, &Parking

$4,291 $4,222$4,168 $4,139 $4,123 $4,133 $4,126



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2010, these program areas collectively account for almost three-quarters ($1.154 billion)of the gross expenditure increase incurred by the City.

Expenditures for rate-supported programs have grown to compensate for historicunderinvestment or to meet service expansion priorities. The majority of this increase isattributable to the budget of Toronto Water, which grew by 34.5 percent in real terms(26.3 percent when adjusted for population growth). Toronto Water has expandedexpenses related to the state-of-good repair backlog, wet weather flow management and basement flooding protection.

Solid Waste Management Services has increased more modestly with 8.4 percent realgrowth and 1.8 percent growth on a real per capita basis, primarily to address wastediversion targets. As described in the revenue management section below, these costshave been entirely offset by equivalent growth in utility rates.

On an inflation-adjusted basis, TTC expenditures have increased by close to 14 percentsince 2010. In inflation-adjusted per resident terms, growth in TTC is closer to 7 percent.

These are moderate rates of growth and consistent with the increased density of the cityand greater reliance on transit.

Emergency Services – Toronto Police Service, Fire Services and Paramedic Services –have been subject to substantial operating cost pressures, driven by increasing servicedemand and increasing labour costs. These cost drivers have been partially offset byefficiencies in service delivery. Taken together, these program areas have experiencedinflation-adjusted growth of 5.8 percent and essentially flat inflation-adjusted per residentgrowth (-0.7 percent).

Figure 4 Budgeted overall expenses for 2010 to 2016 (millions)

Program Area $ Total in2016

$ Change

from 2010to 2016

% Change(Unadjusted)

% Change

(Adjusted forinflation)

% Change

(Real percapita)

Toronto Water $1,158 $391 50.9% 34.5% 26.3%

Solid Waste Management $389 $69 21.6% 8.4% 1.8%

Toronto Parking Authority $137 $13 10.1% (1.9%) (7.8%)

Debt/CFC $722 $107 17.4% 4.6% (1.8%)

Emergency Services $1,772 $279 18.7% 5.8% (0.7%)

TTC $1,860 $402 27.6% 13.7% 6.8%

Other Program Areas1 $2,972 $356 13.6% 1.2% (4.9%)

Cost-Shared Programs $2,743 ($94) (3.3%) (13.8%) (19.1%)

Total $11,755 $1,523 14.9% 2.4% (3.8%)1Includes Transportation Services; Parks, Forestry & Recreation; Non-Program Expenses; EconomicDevelopment & Culture; Information & Technology; Social Development, Finance & Administration andothers; see attachment for more details.

Savings in cost-shared program expenses

Increased City investments in growing program areas have been partially offset by lowerexpenses in cost-shared programs. These programs comprise a range of health and social



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services which receive regular funding from the Province and/or the federal government.These offsets have contributed to achieving balanced budgets in recent years.

As a whole, cost-shared program expenses have decreased by $94 million from 2010levels, representing an inflation-adjusted decline of 13.8 percent. On a real per capita basis, these expenses are down by 19.1 percent overall (Figure 5).

The largest single change is in Toronto Employment and Social Services. This is a resultof a stronger economy (resulting in reduced caseloads), a change in caseload mix withmore singles than families.

In addition, Shelter Support and Housing Administration expenses have risen onlyslightly in nominal terms and are down significantly when adjusted for inflation and population. This is due in part to the fact that increases to operating funding to Purchaseof Service providers have not kept up with the rate of inflation for recent years.

These program savings do not stem from a direct reduction in benefits for households orindividuals provided by the City. The amounts paid through benefits such as OntarioWorks and rent-geared-to-income housing subsidies as well as many other aspects ofthese cost-shared programs are fixed through provincial regulation.

However, lowered investment in these programs may contribute to waiting times forsocial housing, childcare fee subsidies and long-term care as well as the state of goodrepair backlog for social housing.

Figure 5 Cost-shared programs, budgeted overall expenses for 2010 to 2016 (millions)

Cost-Shared ProgramAreas

$ Total in2016

$ Changefrom 2010

to 2016


% Change(Adjusted for

CPI)

% Change(real per

capita)

Children's Services $470 $92 24.2% 10.7% 5.5%Long Term Care Homes &Services

$253 $33 14.9% 2.4% (2.4%)

Shelter, Support & HousingAdministration (includingtransfers to TCHC)

$677 $17 2.5% (8.6%) (14.2%)

Toronto Employment &Social Services

$1,099 ($259) (19.1%) (27.9%) (31.2%)

Toronto Public Health $243 $24 10.8% (1.3%) (5.9%)

Total $2,743 ($94) (3.3%) (13.8%) (19.1%)

The City will not be able to rely on future savings from cost-shared programs.

The provincial assumption of full responsibility for the Ontario Disability SupportProgram and primary funding for Ontario Works means that any gains from lowercaseloads will be realized by the Province.

In addition, savings in SSHA programs relate to expenditures funded entirely by federaltransfers. Past spending pressures within TCHC were addressed by reserve draws andmore debt financing; strategies which are unlikely to be sustainable at the same levelgoing forward.



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In their report from earlier this year, the Mayor's Task Force on TCHC states that thefinancial status quo for the TCHC is not sustainable. It can be expected that TCHC will be a source of significant pressure going forward.

Operating Savings

Each year through the budget process, the City has been able to report progress inaddressing expense pressures through a focus on savings, generally in response to annualtargets. (Annual targets set for the past six years are shown in Figure 6.) It is useful toexplore the extent to which these represent direct and sustained reductions against earlierlevels of expense and represent viable strategies going forward. All of the data in thissection are in nominal or current terms.

Figure 6 Net budget savings targets, 2010 to 2016

2011 2012 2013 2014 2015 2016

-5% -10% 0% 0% 0% -1%

In some cases, savings reported by divisions and agencies have corresponded tosignificant reductions to City expense. The City has undertaken a range of costcontainment and efficiency exercises in the past. The most extensive of these was theService Review Program launched in 2011, which included a cross-corporate CoreServices Review and more than 20 Service Efficiency Studies.

Due in part to service changes identified through the service studies, as well as ongoingline-by-line reviews of program area budgets, the City has realized almost $300 millionin efficiency-related savings since 2010. The City implemented significant cost-cuttingmeasures resulting in the elimination of 1,374 positions and some service reductions in2012. Some savings were controversial and at least partially reversed in subsequent

budgets.

In most years, however, "savings" reported through the budget process do not necessarilyrepresent reductions against the prior year's budget or actual expense levels.

In part this is a function of how the savings targets are set – against budget projectionsrather than actual spending. Savings targets are also typically set for net budget expenses,which means that divisions and agencies with alternative revenues may use these to offsettargets. City divisions, which are subject to greater scrutiny by Budget Committee,typically show greater adherence to these targets than agencies.

Recent patterns of savings and efficiencies are nearing practical limits without service

changes or other direction from Council.

City operating budgets have been highly constrained but, other than social assistance,have not shown actual and sustained reductions in the key cost drivers. This is largely afunction of Council and agency decisions to prioritize maintaining or enhancing servicelevels, rather than service reductions.



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Looking forward, further expense reductions would require strong action and awillingness to both reduce and sustain reductions in service levels. This would requiresignificant changes in Council and agency direction.

Short-term measures to address operating pressures

Most annual budgets have adopted some temporary measures in order to offset expense pressures, including temporary reserve draws and deferral of known operating pressures.The short-term measures used to balance the budgets in earlier years will place someincremental pressures on the 2017 Budget and beyond.

Deferred expenses related to major capital projects

Each year through the budget process, the City also allocates funding for capitalinvestments. The data in this section are all in nominal or current dollars. Total annualcapital planned investment has been in the range of $3 billion over the past six years(Figure 7). This is essential to city building and represents the centrepiece of Council

investment in long-term infrastructure.Figure 7 Total annual capital budgets, 2010 to 2016

The level of capital spending is supported by:

• Borrowing, with debt service constrained to no more than 15 percent of propertytax revenues

• Capital reserves, including as replenished by Council direction to assign 75 percent of any operating surplus to these

• $218 million (2016) allocation in the operating budget to support capital financing(capital from current)

Available funds for capital projects are allocated on the basis of project need andreadiness and confirmed by Council.

2,431

2,016

2,338 2,273 2,2122,000

2,241

761

693

699631 602

825

942

3,191

2,7093,037 2,904

2,814 2,825

3,183

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013 2014 2015 2016

$ M i l l i o n s

Tax Supported Rate Supported



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In addition to the funded capital plan, City divisions and agencies have identified needsor advanced planning for other major capital projects, which have not yet receivedfunding.

These projects include Toronto's Transit Network Plan, the Gardiner Expressway andLake Shore Boulevard East Reconfiguration, the George Street Revitalization project,TCHC repairs and TTC state of good repair backlogs and other emerging projects such asflood protection for the mouth of the Don River and waterfront public realmenhancements. Most of these projects have received in-principle support from CityCouncil or the relevant board.

Taken together, they represent a major city building agenda and Council's future vision ofToronto.

The cumulative value of all unfunded capital projects, or the capital "overhang," is nowestimated to be as high as $29 billion over the next 15 years (Figure 8). This represents a$6 billion increase from the 10-year projection of $22.3 billion provided in the 2016

Budget process, after including forecasted expenditures for the transit network expansionapproved in principle by Council in April 2016. This total will fall in line with futurefunding commitments from the Province and/or federal government.

Figure 8 Summary of unmet capital needs (millions)1

Tier 1 Priorities (TCHC, TTC, Waterfront 2.0 and other City priorities)

TCHC State of Good Repair Backlog (Province/Federal Share of $2.6 billion requirement) $1,728

TCHC Capital Maintenance $650

TCHC Revitalization projects $356

Provincial Grant for Energy Retrofit (TCHC) ($29)

SOGR Backlog to 2% of Asset Value (All City, excluding TCHC/Toronto Police Service) $1,046

TTC Future Capital Needs (Board-approved) $2,679

George Street Revitalization project (SSHA) $480

Long-Term Care Homes & Services capital program $246

Other City Priorities $1,318

Lower Don Flood Protection $975

Waterfront Land Servicing (East Bayfront, West Don Lands and Keating Channel) $150

Waterfront Public Realm Initiatives $350

Waterfront Development Charges/Federal & Provincial Funding ($1,125)

Unfunded projects related to city-wide Environmental Assessments $2,000

Tier 2 PrioritiesTTC Future Capital Needs (not Board-approved) $2,323

Other Programs $597

Transit Expansion Initiatives (Council approved in April 2016)

All Unfunded Transit Expansion Initiatives (preliminary & predesign estimates) $15,300

Total $29,0431These estimates include anticipated amounts to be contributed by other orders of government.


mailto:=@sum(C3:C20)mailto:=@sum(C3:C20)


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There is of course always a surplus of attractive projects relative to available publicfunds. Not all of this expense will be fully realized. However, projects which align withcurrent Council priorities – including necessary transit investments – are likely torepresent expense pressures in the next several years.

The current approved capital plan significantly underestimates necessary future expense,and provides an inaccurate picture of future sustainability. The City cannot continue torely on deferring capital expense to achieve short-term financial objectives.

Summary of past expense polic ies and trends

The City has controlled expense growth over the past six years, as measured in current oradjusted terms. There has not been an overall expense problem.

However, that achievement has rested on a series of unique conditions, which are notlikely to persist:

• reductions in funding requirements for social assistance and shared cost programs

• short-term savings and reserve measures

• deferral of expenses related to major city-building projects and programs.

How the budget has been balanced – revenue management

Budgeted revenue and expense match each year. In parallel with expense, it is importantto consider the patterns of recent revenue performance. This again provides the basis forassessing future sustainability of current policies and trends later in this report.

City revenues have generally performed well over the past six years. In particular, the lastthree years have yielded average revenue growth of nearly $300 million annually. Theactual value of revenues collected has generally been above budget. Toronto has benefited from a number of factors beyond its control and difficult to forecast, includingstrong real estate market performance.

There are significant shifts in the share of overall revenue attributable to differentsources, as shown in Figure 9. Key outcomes over the past six years include:

• decreasing reliance on property taxes

• long-term increases in utility rates, to create sustainable funding for water and

solid waste services

• reliance on user fees, particularly those collected from transit users

• strong growth in the Municipal Land Transfer Tax

• moderate fiscal relief resulting from provincial uploads.



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Figure 9 Budgeted overall revenues for 2010 to 2016

Revenue Source (Millions)$ Total in

2016

$ Changefrom 2010 to

2016


% Change(Adjusted

for inflation)Property tax increase(Council-approved)

$3,931 $237 6.8% (4.8%)

Property tax – cumulativeassessment growth

N/A $232 6.7% (4.9%)

Rate-based(Water, Solid Waste & Parking)

$1,684 $473 39.0% 23.9%

MLTT $527 $351 199.8% 167.2%

TTC(Fares, ridership growth & other)

$1,249 $303 32.1% 17.7%

User Fees, Licenses, Permits $609 $111 22.3% 9.0%

Provincial Uploads (savings) $251 $148 7.3% (4.4%)

Provincial Transfers1 $1,710 ($126) (6.9%) (17.0%)

Federal Transfers2 $155 ($40) (20.6%) (29.3%)

Other revenue sources $1,639 ($166) (9.2%) (19.1%) Total Revenue $11,755 $1,523 14.9% 2.4%

1 Decline represents lower transfers from decreasing social assistance (Ontario Works) caseload and$150 million in eliminated funding under the Toronto Pooling Compensation grant.2 Decline represents end of one-time federal funding towards housing affordability programs anddeclining transfers related to expiring social housing mortgages.

Property tax

Toronto and other Ontario municipal governments have access to a limited range of taxrevenue sources. Direct taxation on the properties owned by residents and businesses

represent by far the largest source of revenue for municipal services.

Property taxes have a number of important characteristics. These are highly stable and predictable. Corporate and personal income and sales taxes available to the federal and provincial governments demonstrate much higher volatility.

Property taxes are also efficiently assessed within a centralized provincial system. Taxcollection is relatively straightforward and there is limited potential for evasion. Taxes on property are broadly borne and well matched to the overall financing of public goods.Provincial tax credits are intended to offset disproportional burden on households withlower incomes.

The stability and efficiency of property tax yield and collection are important tomunicipal governments faced with a legal requirement for annually balanced budgets.

Property taxes are also highly visible. Property taxes do not, under provincial legislation,rise automatically with property values. Municipalities are required to reset rates on anannual basis. Assessment growth does increase with new additions to the stock of real property, typically about one percent annually for Toronto.



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Toronto has pursued two recent core objectives with respect to property taxation: (i)maintaining an overall tax rate increase at or below inflation. (ii) rebalancing property taxincreases from historically over-burdened classes (industrial, commercial and multi-residential) to residential. The rebalancing of property tax burden is required by provincial legislation, although the City has made it a priority to progress slightly more

quickly than mandated.

The cumulative result has been a sustained decline in the relative yield from propertytaxes:

• a gain of $237 million or 6.8 percent from 2010 to present, on a base of nearly $4 billion, through Council-set rate increases

• adjusted for inflation, the City is budgeted to collect 4.8 percent less throughCouncil-approved property tax increases in 2016 than it did six years ago

• a decrease from 60 percent in 2006 to 49 percent in 2016 as a share of the City'stotal budgeted own source revenue.

Toronto residential property taxes remain well below the level of other large Ontariomunicipalities, measured on an average household basis. Council's priority towardslimiting residential property tax increases to the rate of inflation has translated intooverall property tax growth that is actually less than the rate of inflation.

Utility rates

Over the past six years, a greater share of revenue increase has been attributable to waterrates, Solid Waste Management rates and Toronto Parking Authority revenues than toany other single source of revenue.

The strong growth of utility rate-based revenues is primarily due to Council decisions tocreate a system in which increases in utility charges are matched to capital and operatingneeds. Toronto Water's funding strategy involved consistent nine percent annual waterrate increases from 2006 to 2014 and eight percent increases in 2015 and 2016. Thisstrategy of dedicated revenue sources investments has allowed Toronto Water to addressthe major expense priorities described earlier.

Solid Waste Management Services has also established a sustainable source of fundingfor ongoing operations and capital investment since it transitioned from a tax-supported program to a fee-based program in November 2008.

User fees

In general, revenues attributable to user fees (such as those collected from recreational program users and paid-entry venues like museums), licensing fees and permitting feeshave been relatively stable. Since 2010, these fees have grown just slightly more thaninflation, by an average of less than one percent annually in adjusted terms.



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TTC revenues

TTC revenues have grown considerably over the past six years, due to increases in fare box revenues (from TTC fare increases and ridership growth) as well as other sourceslike advertising sales. TTC fares are set annually by the TTC Board to fund operatingexpenditures, above the amounts provided through City funding, with due regard given tothe impact on customers and ridership.

Over the past six years, TTC revenues have increased by an average of almost $50million annually – representing cumulative inflation-adjusted growth of 17.7 percent over2010 levels or about three percent per year.

During this time, more incremental revenue has been collected by the TTC ($303 million)than from Council-set increases to the property tax rate ($237 million).

Municipal Land Transfer Tax

Toronto is the only municipality in Ontario with the authority to levy a tax on land sales –

referred to as the Municipal Land Transfer Tax or MLTT. Administratively, the MLTT isassessed and collected with the Province's Land Transfer Tax and remitted to the City.MLTT is borne by the relatively small number of residents and business which engage inreal estate transactions over the course of any given year. Real estate market performanceis traditionally somewhat cyclical. MLTT revenues are much less certain than most othermajor municipal funding sources.

With the exception of the recessionary declines in 2008 to 2009, MLTT performanceclosely aligns with a period of rapid growth in real estate transaction volume and prices.Over the past six years, $351 million or almost a quarter of the City's net increase inrevenues is attributable to this source.

In inflation-adjusted terms, the MLTT has grown by 167 percent from 2010 levels. Thisis about seven times greater than the growth rate for any other source of City revenueduring this time. As a result of this rapid expansion, the City now collects about 1.5 timesmore revenue through the MLTT than it did six years ago.

The rise in the MLTT has been essential to Council's ability to maintain at or belowinflation-level property tax increases. To a large extent, current finances rely on what has been a windfall revenue gain from a buoyant real estate market.

Provincial impact

The sequence of amalgamation and provincial downloading of services to municipalitiesin the late 1990s and early 2000s provided significant financial challenges for Toronto.The City was given increased financial responsibility for social housing, socialassistance, other provincially-mandated services and transit. The operating and capital pressures associated with these programs, many of which preceded the download,continue to impact the City's budget today.



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Starting with the passage of the City of Toronto Act (COTA) in 2006, the Province has provided unique flexibility to Toronto with respect to fiscal policy, including the abilityto implement new revenue tools, such as the MLTT.

The upload of key cost-shared social programs has provided some financial benefit. Thiswill represent a gross reduction of $309 million in City expenses, when fully phased-in by 2019.

The loss of Toronto Pooling Compensation, announced in 2013 and implemented by theProvince over the 2014 to 2016 years, has partially offset these gains. When accountingfor the provincial elimination of Toronto Pooling Compensation grant, the net impact tothe City's gross budget is a savings of $180 million.

The 2015 budget largely deferred the adjustment to the loss of Toronto PoolingCompensation through the use of a self-financed loan from capital. The 2015 Budgetidentified $25 million of expense savings to bridge this gap, and the balance of anyfurther revenue or savings measures remains as an outstanding pressure.

Preliminary expense projections for 2017 to 2021

The earlier discussion of expense illustrated the extent to which the conditions whichsupported low expense growth – particularly savings in cost-shared programs and the practice of deferral financing decisions with respect to capital projects – do not provide aviable basis for future planning.

It is important to provide an empirical or forecast basis for future Council decisionmaking. As emphasized earlier, projections are inherently uncertain and will be adjustedas better information becomes available.

Figure 10 represents an early estimate of operating expense pressure over the next fiveyears. This shows cost pressures identified by agencies and divisions to maintain currentlevels of service. Utility expenses are fully offset by revenue and do not contribute to afiscal gap. These are shown because, consistent with the analysis in this report, theyrepresent a share of gross cost pressures and service improvement for residents and businesses.

It is important to note that the data are presented on an incremental basis – each year addson the prior pressure.

Some factors help to lower actual costs in the future, notably savings efforts. Otherfactors may drive expense pressures higher than the projections provided here, including:

• pressures from Toronto Police Service. (In this analysis, pressures are assumed at$0 and will be addressed by management actions and result in no direct or indirect pressure on other City expenses)

• any new investments or priorities are identified by Council, including the PovertyReduction Strategy



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• implementation of measures resulting from the recommendations of the Mayor'sTask Force on TCHC

• any of the deferred capital projects that are actually undertaken, including transitinvestment

The full cost of incremental financing of the $29 billion capital overhang is separatelydescribed in Figure 11 for reference. This will be offset to some extent by contributionsfrom other orders of government.

These pressures are similar to those shown in past budget cycles. The overall rate ofgrowth implied is approximately five percent for 2017, a figure well within Torontoexperience. The difference is that the factors which offset those earlier expense projections are less likely to materialize and will not offer relief in the future. Futureexpense budgets will require more realistic analysis of sustainability.

Figure 10 Projected incremental base expense growth, 2017 to 2021

Figure 11 Projected incremental debt charge growth for unmet capital needs, 2017 to 2021

419

250198

261 266

60

63

44

52 46

121

137

60

53

23

10

6

7

100

200

300

400

500

600

700

2017 2018 2019 2020 2021

$ M i l l i o n s

Base Operations Rate Programs Base Capital Financing Annualizations

622

459

308

373

312

49

73

135

196

225

0

50

100

150

200

250

2017 2018 2019 2020 2021

$ M i l l i o

n s



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Preliminary revenue projections for 2017 to 2021

As with expenses, it is important to assess the sustainability of revenue trends into thefuture.

The estimates provided in Figure 12 are based on recent Council policy direction:

• extending existing water and solid waste utility fee policies, which are matched toexpense and thus fiscally neutral

• holding the residential property tax to the rate of consumer price inflation whichis assumed at two percent

• maintaining current policies on commercial and multi-residential protected property tax classes;

• growing TTC and other user fees at the rate of consumer price inflation;

• provincial uploads reaching maturity in 2019, consistent with negotiated

agreementsThis forecast also models the potential revenue from a special dedicated property tax levyfor priority transit and housing capital projects (also known as the "City Building Fund")which was approved through the 2016 Budget process for inclusion in the 2017 to 2021 preliminary tax-supported budgets.

As per Council direction, this assumes a 0.5 percent residential property tax increase to be considered in 2017 that increases by an additional 0.5 percent in each year from 2018to 2021.

The MLTT is assumed to be sustainable at current levels, and includes an additional $20million realized through the first three months of 2016.

The performance of real estate markets is difficult to predict. The MLTT could continueto grow strongly over the coming years; but there is also the possibility of contraction.MLTT remains a somewhat uncertain source of revenue for Toronto in the years ahead.

As displayed in Figure 12, a revenue forecast built from these assumptions will continueto exhibit positive growth over the coming years. With the exception of 2017, revenue isexpected to grow incrementally by approximately $210 to $260 million annually through2021. The below the line (i.e., negative) figure showing for 2017 is a function ofreversing one-time measures adopted to support the 2016 Budget.

These projected revenue levels are considerably lower than those experienced for the pastthree years, showing a base case in the absence of double digit MLTT increases orCouncil decisions (Figure 13).

Additional detail concerning both the expense and revenue pressures anticipated for 2017are described later in this report.



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Figure 12 Projected incremental revenue growth, 2017 to 2021

Figure 13 Incremental revenue growth, 2010 to 2016 (budgeted) and 2017 to 2021 (projected)

40 41 42 42 43

52 53 54 55 56

2014

16

(9)(20) (16)

6063

44 52 46

(59)

74

71 73 7614

14

14 14 15

(60)

60

120

180

240

300

2017 2018 2019 2020 2021

$ M i l l i o n s

Assessment Growth Property Tax Increase - Res. @ 2%

MLTT Fed/Provincial Grants

Rate Programs Other Revenue Changes

City Building Fund

140

261

216217 219

462

248

164

198

337

284 292

140

261

216 217 219

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

$ M i l l i o n s



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Projected net pressures for 2017 to 2021

The figures below shows the net budget pressures or "gaps" which would result from theexpense and revenue forecasts contained in this report. They provide the best and mostconservative assumptions regarding the combination of annual revenue and expense

measures required to sustain the current service volumes over time.

For 2017 this represents a significant unresolved pressure of 14 percent on a net basis –essentially a gap to be managed through a combination of expense reduction or revenueincrease or both.

Figure 14 presents incremental values. As such, it provides annual estimates of thefinancial pressure, based on the assumption that the pressures from the previous year(s)are fully addressed through sustainable expense or revenue measures. If they are notaddressed, or are simply deferred through short-term measures, these pressures willaccumulate over years. Figure 15 displays the cumulative impact if no action is taken toaddress these pressures in a sustainable way. (It is reasonable to assume that the pressures

for out years will fall somewhere between these values expressed in these two figures.)

Figure 14 Projected incremental net pressures, 2017 to 2021 ($ millions)

Figure 15 Projected cumulative net pressures, 2017 to 2021 ($ millions)

(483)

(199)

(92)

(156)

(93)

(600)

(500)

(400)

(300)

(200)

(100)

2017 2018 2019 2020 2021

(483)

(681)

(773)

(929)(1,022)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

2017 2018 2019 2020 2021



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Summary of projected net pressures for 2017

This report is primarily concerned with medium-term projections and providing Councilwith a sense of potential future policy directions. However, there will also likely beconsiderable interest in the 2017 budget cycle.

Figure 16 on the following page provides an early indication of the potential challengesanticipated for 2017.

This information is presented on a "net basis." This is distinct from the earlier analysis inthis report, but consistent with the normal presentation of pressures as part of a budgetlaunch.

This means that the figures shows the anticipated opening pressure on the property tax base ($588 million) after all offsetting expense and revenue are factored in. Subtractingforecasted revenues from property tax, assessment growth and City Building Fundrevenue for 2017 reconciles to the $483 million gap noted in the preceding section.

The key sources of pressure are:

• long-term inflation and core cost drivers;

• TTC pressures and annualization; including contractual payments for Presto use;

• TCHC operating gap, as reserve and debt financing offsets are less tenable;

• Realization of deferred pressures for Toronto Pooling Compensation loss andemployee liabilities;

• Catch up with and one-time expense and revenue measures implemented in prioryears, which must now be reversed.

As with the earlier analysis, this is a base case which does not account for any additionalnew expenses or savings that may be approved by Council. Any incremental operatinginvestments or new capital projects will increase expense. Any savings initiatives willoffset expense.



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F i g ur e

1 6

S umm

ar y of 2 0 1 7 n e t pr e s s ur e s b a s e d on c ur r en t a s s um p t i on s



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Potential shor tcuts to balance the budget

Before undertaking next steps towards a more sustainable financial model, it is importantto consider the extent to which Council may rely on several potential approaches. Tovarying degrees, these have been used in past years to achieve balanced budgets. Theseapproaches carry a degree of risk and/or are inadequate to address projected pressures.

Provincial or federal government fund ing

The funding models for Council-approved capital projects have traditionally relied onassumptions for future funding contributions from the governments of Ontario andCanada. Council has a broad range of requests, primarily centred on transit, waterfront projects and social housing. These are projects of provincial and national concern.

It is hoped that Canada and Ontario will provide new investments towards these priorities. But these funding contributions are likely to be contingent on matching orincremental City commitments. Furthermore, the fiscal challenges that Toronto will needto address are long-term and structural while investments from other orders ofgovernment are anticipated to be short-term and project specific.

Municipal Land Transfer Tax

It is possible that MLTT will continue to perform strongly into the future. But the City'sdegree of reliance on this single revenue source is already at a point of potentially highrisk for a municipal government.

Draw down reserves

Past budgets have relied substantially on one-time reserve draws to address operating pressures. On a comparative basis, the City’s aggregate reserves and reserve fund account balance is much lower than those in other Ontario jurisdictions. Continued use of reservefunding will increase the City's exposure to financial risk.

TCHC does maintain reserves that, while diminished, may be applied to offset expense pressures. This would worsen what are already acute future capital financing shortagesfor TCHC. (TCHC could also continue its aggressive borrowing program; however, debtlevels are reaching their capacity for repayment and require City guarantees.)

Manage down the surplus

The historic experience of high surpluses seems to similarly have reached a conclusion.

The 2015 surplus is likely to be well under $150 million – less than 1.5 percent of overallexpense. This represents only a modest buffer against unanticipated pressures. ByCouncil policy, surpluses are largely directed toward future capital investment.

Any planned reduction in the surplus requires cuts in future capital projects.



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Lower "capital from current" financing

It is possible to reduce the operating funding used to support capital projects. But thiswould require a direct reduction in capital projects.

Conclusions and consequences of this analysisIt important to consider the potential consequences of inaction. Any operating deficit orthe threat of an operating deficit will require immediate and potentially dramatic action toremedy. Options are limited in the short-term and default to solutions such as blanketspending freezes and immediate fee and tax increases. Unplanned actions almost alwaysgenerate unintended consequences, future pressures and are largely ineffective inaddressing structural challenges.

A second and potentially greater consequence relates to Council's vision for City servicesand investments going forward, and the financial plan it will pursue to achieve it.

If Council decides to affirm a more restrained vision going forward, this would mean thatover the coming budget cycles Council and staff will focus primarily on expensemanagement measures and ensuring the efficient delivery of a smaller footprint ofmunicipal services.

As noted above, Council has not pursued this direction through previous budget cycles.In fact, Council decisions have tended towards additional investment and, in some cases,reinstating previously cut services and expenses.

Council may continue to pursue a strong city building agenda that includes investmentsto maintain or strengthen municipal services. These priorities may include transitenhancements, the Poverty Reduction Strategy, addressing the Mayor's Task Force

recommendations to stabilize TCHC and continued support for economiccompetitiveness.

Council may also endorse new capital projects, particularly those required to comply with provincial mandates (e.g. requirements under Accessibility for Ontarians with Disabilities Act ), address state of good repair needs and achieve its transit priorities.

It is no longer appropriate to "kick the can down the road" on these difficult financialdecisions. There is a need for a more strategic approach to financial planning. Theremainder of this report provides some preliminary directions and principles for how thismay be achieved in the months and years to come.



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Next steps for Toronto 's long-term financial plan

The primary objective of this report has been to describe the patterns and challengesunderlying the Toronto fiscal context, and the extent to which the outcomes of the recent past provide an unreliable basis for future decision-making.

This analysis is essential; and it will almost certainly require further conversation atCouncil and within the community to clarify the assumptions and conclusions presentedin this report.

But the diagnosis of the problem is only the first step.

The balance of this report outlines key considerations and proposed actions, subject toCouncil direction, for the development of a sustainable long-term financial plan. Thedevelopment of this plan will involve measures to be implemented from the perspectiveof both long-term expense and revenue management. Specific options andrecommendations are likely to come forward through a series of subsequent reports andthrough the annual budget process, as appropriate.

This will be an iterative and likely challenging process, involving complex fiscal parameters and estimates, dialogue with Council and committees and input from thecommunity.

The following actions will be required:

• Manage immediate pressures and avoid compounding financial challenges (e.g.,avoid further expense deferral tactics that simply push off rather than address corecost drivers.)

• Undertake a pragmatic prioritization of future operating investments and capital

expense, on a multi-year basis.

• Implement longer term expense constraint.

• Explore material revenue gains, through both existing and potentially new tax andnon-tax sources.

This process will require some time, although in some cases work will necessarily beexpedited over the next few months to address the pressures identified for the 2017 budget cycle.

Long-term expense management

As the analysis in this report makes clear, the challenges in City finances are not primarily a function of rising costs. The City must, however, maintain a fundamentalfocus on responsible and effective expense management. It is imperative that divisionsand agencies, working with Council direction, explore efficiencies and cost reduction inorder to create resources for other investment priorities. This work must be done beforeimposing any additional financial burden on Toronto residents and businesses.



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As Council gives consideration to a long-term approach to financial planning, it should be focused on the considerations described below.

“ Whole of government” approach to expense management

It is important to take a comprehensive approach to expense management which accounts

for all aspects of City operations.

Based on the foregoing analysis, it is reasonable to expect that the primary drivers ofexpense over the next five years will be emergency services, transit operations and thefinancial challenges of TCHC. The decisions that Council takes with respect to theseemerging expense needs will largely determine the overall expense level of the Citygoing forward and the consequent revenue requirements.

The City has set out annual savings targets in recent budget processes with varyingdegrees of compliance and impact. It is important that Council approve these targets andCity divisions and agencies provide options to meet these targets. Measures that simply

defer expenses to future cycles should not be accepted.Consideration also needs to be given to how these targets are set. In general, thesuccessful expense containment efforts of large governments have involved:

• differential targets based on priority of expense, including particular focus on keycost drivers

• multi-year targets to allow for innovation and investment which create the potential for longer-term savings

• centralized investment pools for the purposes of funding essential restructuringcosts

Link program and financial planning

Some of the most fundamental and important steps in achieving successful long-termfinancial management relate to Council decision-making and direction. The lack ofsufficient integration between program planning and the budget process has allowed forthe development of unfunded operational plans and, particularly, the significant capitaloverhang.

Council has an opportunity to establish broad guidance for divisions and agencies withrespect to the likely level of incremental investment available for services and City- building infrastructure, before plans are developed and come forward for approval.

Review and develop a funding p lan for pr iority capital pro jects

It may be appropriate for Executive Committee to review the overall capital budget witha view to determining what is necessary for City building investment. The designation ofcapital programs as funded versus unfunded is currently done on a somewhat arbitrary basis. It is constrained by the City's debt limit and associated affordability concerns.Decisions regarding which projects are allocated for funding should be made by Council.



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In addition, substantial City resources are devoted to capital projects. The vast majorityof these are delivered on time, on or under budget and represent appropriate value formoney. There may be potential to further improve capital project management by:

• consolidating and strengthening major project management

• developing improved costing models, including consideration of maintenance andoperating costs

• better mapping cash flow and matching budget needs to operational capacity.

Council may also wish to explore the potential to raise the debt service ceiling of 15 percent of tax revenue, allowing for increased investment in the shorter and mediumterms. This policy limit is within the purview of Council to modify. But it must also berecognized that any increases in the debt service ceiling will ultimately require newrevenues to fund the additional debt charges.

Maximize savings through efficiencies and responsible service level changes

In order to achieve substantial savings going forward, consideration will have to be givento the existing service levels delivered by City divisions and agencies. In some instances, policy outcomes may be maintained or enhanced through innovative approaches toservice delivery. But there are limits to savings that can be achieved without reducingservice levels.

Savings opportunities and proposals by divisions and agencies should be assessed againstcommon criteria including:

• level of savings

• timing and duration of savings

• transactions costs

• execution complexities and risks

• prerequisites, including early stage investments

• risk of adverse or unintended consequences

• compatibility with other City objectives, including living wage and equity goals

Focus on long-term labour cost drivers

The largest single driver of City expense relates to the wage and benefits compensation ofCity and agency workers. Expense tends to climb moderately over time, and the patternof settlements for City workers now falls below expected inflation.

Recent emergency service and TTC labour contracts have resulted in considerable wage pressures. These are negotiated in the context of mandatory arbitration models, whichtend to limit the potential for substantial cost savings.

Numerous City agencies negotiate separate agreements with a number of bargainingagents. This raises challenges in terms of consistency, fairness and overall efficiency. It



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may be appropriate to explore more coordinated approaches to achieving fair andequitable agreements with leading bargaining agents.

Contracting out and alternative service delivery

The City has a number of services which are delivered through external contractors, both

for profit and not-for-profit.

Contract and alternative service delivery may provide the potential for serviceefficiencies and further savings. These must, of course, be consistent with City andagency obligations under collective agreements and applicable legislation, includingsuccessor rights. The assessment of any potential external contractual arrangement must balance:

• potential savings

• potential impacts on current and future labour force

•

City policy intentions regarding precarious work and living wages• robustness of the competitive market and potential exposure at the completion of

an initial or subsequent contract

• ability to effectively monitor and ensure appropriate quality and outcomes.

Back office savings

The City has sought to achieve savings in shared services over a number of budgetcycles. There are further opportunities for modernization of back office functions,including:

• completion of planned shifts to automated attendance management, direct depositof expense and other payments

• consolidation of shared services with major agencies

• shift of some municipal functions and services to e-channels

• integrated and shared communications and public outreach, including withagencies.

The City's pending Real Estate Review may offer options for potential consolidation and policy harmonization.

Limits to savingsIt is important to have realistic expectations of savings initiatives. Toronto budgets have,as noted, been characterized by a wide range of stringent targets and considerable fanfare.Despite these, year over year expense has increased. The structural drivers of manyexpense pressures have not yet been addressed and cannot be realistically held withoutsignificant policy change. Council has frequently reversed earlier savings measures.



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Senior governments often set stringent savings objectives over time. As a practicalmatter, these are rarely met. This is not to detract from the critical importance of savingsand efficiency, but rather to ensure that objectives are both appropriate and will beachieved.

Long-term revenue managementCouncil should adopt an overarching and strategic revenue framework based on soundrevenue management strategies. There is a need to take a more deliberate and strategicapproach to revenue policy.

The challenges associated with revenue should not be addressed in a single step. As withexpense, these are structural in nature. Major policy shifts would be required to mitigaterisk, encourage equity and provide for fairer and more transparent basis for Toronto public finance.

Broad policy considerations

It is important that all revenues be treated with equal respect and seriousness – taxes,utility charges and fees represent resources drawn from Toronto residents and businesses.

Budget transparency is critical in terms of user and utility fees.

It is essential that Toronto's principal revenue sources are resilient and support predictable achievement of a balanced budget. Any deviation must be corrected in thefollowing fiscal year, potentially requiring unplanned and difficult expense and revenuemeasures.

Similarly, as Council recognizes increased permanent expense – essentially all increases

in operating expense – it will be critical to ensure matching increases in highly stablerevenue sources.

Short-term or uncertain revenue sources should not be devoted to base expense.

Property tax remains the default and most stable revenue source available to the City, barring changes in provincial policy.

User Fee Policy

Toronto has a number of policies which match fees to benefits accruing from publicservices. It may be appropriate to expand the fee-for-service model, subject to:

• avoiding indirect taxation

• overall access, social cohesion and economic development goals.

Preferential price or price concession policies may offer some potential tightening to limitleakage.



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Asset rev iews

The City holds a wide variety of land, corporate and other assets. Optimizing asset performance and disposition of under-utilized assets may improve the City's fiscal position.

City assets should be reviewed in terms of potential to increase returns within givenownership, governance and operational structure(s) and the value of partial/full sale inorder to fund key city-building initiatives.

Any proposal should be assessed in terms of:

• value

• impact on future revenue stream

• tax and other leakage

• broader policy objectives.

The following summarizes recent activities in regard to key strategic assets:

• Toronto Hydro Corporation: A recent expenditure and revenue plan from theOntario Energy Board anticipates positive income growth through capitalreinvestment, leading to higher dividends paid to the City over time, accompanied by a period of higher debt levels.

• Toronto Parking Authority: A report in 2016 is expected to comment on the parking rate strategy and make appropriate changes to revenue sharing.

• Land holdings: A Real Estate Review is currently being conducted by the City'sChief Corporate Officer to make recommendations to improve the City's approach

to the use and disposition of surplus lands by various City divisions and agencies.

City Building Fund

Council has directed the incorporation of a City Building Fund into the 2017 Budget process. This will establish a vital mechanism for providing a segregated fundingmechanism. This can offer public and potentially intergovernmental reassurance thatselected new revenue sources are applied to new investments.

The City Building Fund offers an important mechanism to:

• hold revenues from an incremental property tax levy, as proposed by Mayor

• receive incremental federal and Ontario support

• hold potential gains from incremental asset performance or monetization

• hold potential proceeds from new revenue measures



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Revenue options report

Council has requested that staff report back on potential revenue measures to the June2016 meeting of Executive Committee. The staff report and any subsequ

Documents

City of Toronto's long-term financial direction